Fed unveils oversized rate cut

U.S. markets closed slightly lower on Wednesday after the Federal Reserve cut rates by 50 basis points, reducing the target range to 4.75%-5%. Despite initial record intraday highs, major indices pulled back during Fed Chair Jerome Powell's press conference. The S&P 500 fell 0.29%, the Dow dropped 0.25%, and the Nasdaq declined 0.31%. Treasury yields rose, with the 10-year note up to 3.69%. The Cboe Volatility Index (VIX) climbed to 18.23. European markets closed mixed amid cautious trading.

Summary for 19.09.2024

Asian equities rose in choppy trade on Thursday, buoyed by the Fed's 50 basis point rate cut but tempered by concerns over higher neutral rates. Japan’s Nikkei 225 and TOPIX outperformed, rising over 2% as the yen weakened. China’s markets saw modest gains, while Australia edged up 0.3%. South Korea’s KOSPI fell 0.5% in catch-up trade after a holiday break.

European and U.S. markets are set to open with cautious optimism later today, following the Federal Reserve's larger-than-expected rate cut and the start of an easing cycle, despite ongoing concerns about a potential economic slowdown.

Oil prices fell this morning following mixed U.S. oil inventory data and concerns over the Federal Reserve's recent rate cut, which raised fears of an economic slowdown. Despite a significant draw in crude inventories, builds in distillates and gasoline suggest cooling U.S. fuel demand. The Fed's aggressive cut has also sparked worries about potential economic headwinds.

The Fed made its first rate cut since 2020, lowering the target range to 4.75%-5.0%. The 50-basis-point cut reflects confidence in inflation moving toward 2% and growing concerns about employment risks. The Fed's updated dot plot indicates two more cuts this year, four in 2025, and two in 2026, aiming for a 2.9% neutral rate. Economic growth is expected to remain resilient, with a soft landing anticipated.

Jefferies is cautious about demand for Apple's new iPhone 16 in China, noting that while the models are “sold out” on Apple's site, they remain readily available on third-party platforms like Tmall and PDD. Delivery times on Apple’s site haven’t increased, which could signal weak demand. Conversely, demand for the pro models is improving in markets outside China, with longer wait times reported in the US and Europe.

Bank of America analysts suggest Starbucks consider spinning off its China business due to its volatility, lower profitability, and slower growth compared to other markets. Despite past strong performance, China’s same-store sales growth has recently turned negative, and store EBITDA has declined. Spinning off China or shifting to a licensing model could reduce volatility, improve returns, and allow Starbucks to focus on its core U.S. market.

T-Mobile expects adjusted free cash flow of $18–19 billion by 2027 and plans to return up to $50 billion to shareholders through buybacks and dividends. The telecom giant outlined growth driven by strong customer additions, AI collaborations with Nvidia and OpenAI, and aims to add 12 million 5G broadband customers by 2028. Despite the positive outlook, shares fell 3% after the announcement.

Senator Bernie Sanders announced that major generic drug companies confirmed they could produce and sell generic versions of Novo Nordisk's diabetes drug Ozempic for under $100 a month. This statement comes ahead of a Senate hearing where Novo Nordisk's CEO will testify about the high costs of Ozempic and Wegovy. Currently, Ozempic costs $935.77 per month.

Reckitt Benckiser's shares rose yesterday after Bloomberg reported the company is exploring a potential £6 billion sale of its homecare assets, including Airwick and Cillit Bang. Reckitt is also considering options for its Mead Johnson infant formula brand. The formal sale process for homecare assets is expected to start soon, with completion anticipated in 2025.

William Blair analysts have initiated coverage on Arm Holdings with an Outperform rating, citing strong growth prospects driven by higher average selling prices, market share gains, AI demand, and a new upgrade cycle. They project a 35% upside for Arm's shares, bolstered by its scarcity value and growth in the data centre market. Separately, Broadcom also received an Outperform rating, with analysts forecasting a 30% upside, driven by growth in networking, AI chips, and software.

William Blair also initiated coverage of NVIDIA with an Outperform rating, highlighting its leadership in parallel computing and AI. They noted NVIDIA’s substantial revenue growth, especially in data centres, and its expansion into broader semiconductor and cloud services markets. Despite strong growth prospects and high margins, risks include exposure to China and CEO Jensen Huang's crucial role.

Citi Research maintains a "buy" rating on ASML, despite recent investor sentiment dips. The firm has lowered its 2025 revenue estimate to €36 billion but remains bullish on ASML’s long-term prospects due to its leadership in EUV lithography. Citi's target price is €1,150, offering a potential upside of over 60%. ASML's strong position in advanced semiconductor technology supports this positive outlook.

Goldman Sachs has launched coverage of the European insurance sector, introducing a new valuation framework under IFRS 17. They remain positive, noting the sector's strong fundamentals, with nine key insurers covered. Buy recommendations were given for Generali, Allianz, Aviva, and Munich Re, while AXA, Zurich, Swiss Re, Legal & General, and Phoenix received neutral or sell ratings. The sector is seen as attractively valued despite recent performance challenges.

Citi analysts expect the Federal Reserve to cut rates by 50 basis points again in November, following a similar cut yesterday. The Fed’s move reflects a shift towards addressing labour market concerns rather than just inflation. Citi forecasts a total of 125 basis points in cuts for 2024, with risks leaning towards quicker rate reductions if labour market weakness continues. Powell has signalled a higher neutral rate moving forward.

Piper Sandler is optimistic about equities, suggesting they have "more room to run into year-end" and predicting the S&P 500 could reach 5,800 by 2024. Despite recent market highs and mixed tech share performance, they anticipate volatility from upcoming Fed rate decisions. The firm is watching 10-year bond yields closely, noting that a drop below 3.25% could trigger accelerated rate cuts and market turbulence.

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